General Electric Company: GE Stock Just Became a Better Buy

GE is getting back to its roots by exiting the financial business

General Electric Company (NYSE:GE) is getting out of the banking business.

Even though GE has been headed in this direction for some time, the decision still feels a little shocking. After all, it’s the end of an era.

And considering the cash windfall that will come with the deal, it’s also very good news for anyone holding GE stock.

A Farewell to GE Capital

The financial crisis makes it hard to remember what a superstar GE Capital used to be. Indeed, long before the crisis — back in the Jack Welch days when GE was the biggest, most admired company on the planet, and GE stock was among the most desired — GE Capital was known as the company’s secret weapon. It was the main engine of profits and allowed General Electric to beat Wall Street estimates like clockwork.

GE Capital went from secret weapon to big, honking albatross, and it clearly no longer has a place in an industrial company that wants to focus on things like jet engines, power turbines and medical devices.

GE Capital still accounts for about half of GE’s profits, but influential shareholders and company management have come to realize that the risk and regulatory stresses are simply not worth it.

The finance unit is much smaller since before the financial crisis, and yet it’s still the nation’s seventh-largest bank by assets.

With so many assets under its care, GE Capital was designated a “systemically important financial institution,” which means its regulatory burdens are even more strenuous in these days of especially tight federal oversight.

GE Set for Sales and Spinoffs

So, everything must go.

Well, OK. Not everything.

GE will keep finance business like aircraft leasing, as well as energy and healthcare financing, because those help support sales in its industrial units. (Customers for items like jet engines and CAT scanners often require financing to complete a purchase.)

But the giant banking businesses are to be sold or spun off over the next couple of years.

Although this process will take some time to complete, it’s probably the best news GE shareholders have received from the conglomerate since before the financial crisis.

A smaller, more focused GE will become a pure-play industrial stock — not the kind of hybrid that went out of fashion decades ago. That makes it easier for shareholders to understand operations.

It also means that investors who want exposure to an industrial stock don’t have to take a financial sector stock in the deal.

Additionally, shareholders are going to get a significant amount of cash from the sales and spinoffs. GE said it could get a dividend of $35 billion from GE Capital. It also pledged to buy back $50 billion in stock.

Bottom Line

A share buyback and dividend would have been more than enough to get GE stock moving again in the short term.

And although it will make it harder for General Electric to beat Street earnings estimates, exiting the banking business makes GE stock look a lot better in the long-term, too.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.